Niederhoffer tells the magazine his three decades as a professional investor were based on the widespread recklessness that fed the current mortgage mess. He said he made fortunes several times over “typically by relying on methods that other traders considered reckless or unorthodox or both."

Both could invest in the businesses whose stocks are sold in the market. Instead they chose to invest in options about the direction that the market may take those businesses. It is still gambling about the direction. Both men are no longer active. Both were using others' money in their hedge funds. One is saying he was a steady low risk gambler, the other was saying he steadily makes cheap bets on black swan events. It is still hedge funds. I'll skip investing with the Wall Street celebrities, for the Valley Forge and Santa Monica ones. So I'll end up in the dowdy apartment in Athens with Taleb's grandfather for a neighbor. Those guys have not considered how good life can be without having to be rich and famous. Their wealth defines their day. That is sad.

Or you could be a little less generous with Taleb: he went under just like an inveterate gambler, perhaps because he is an inveterate gambler. At the very least, both Taleb and Neiderhoffer made it their jobs to play with fire.

The point of the Neiderhoffer article seems to be that he is smart and competitive, but can't say no to disastrous risk. In other words, smart-stupid.

Or you could be a little less generous with Taleb: he went under just like an inveterate gambler, perhaps because he is an inveterate gambler. At the very least, both Taleb and Neiderhoffer made it their jobs to play with fire.

There is a big difference between the two. Taleb's strategy did in fact have low downside risk. His fund did not blow up; it didn't do much of anything apparently! The investors probably liked the original novelty of the fund, but like most everyone else, want to see some meaningful gains in order to keep their investment in place. They didn't get them, so they gave up on it.

There is a big difference between the two. Taleb's strategy did in fact have low downside risk. His fund did not blow up; it didn't do much of anything apparently! The investors probably liked the original novelty of the fund, but like most everyone else, want to see some meaningful gains in order to keep their investment in place. They didn't get them, so they gave up on it.

Yes, a big difference. Does anyone know of a link to an article or other discussion about the demise of Taleb's fund?

matt wrote: His fund did not blow up; it didn't do much of anything apparently! The investors probably liked the original novelty of the fund, but like most everyone else, want to see some meaningful gains in order to keep their investment in place. They didn't get them, so they gave up on it.

No wonder the guy had nervous tics: coming in every day & looking for the rare black swan to cross his screen, and it costs money every day that it doesn't happen:

"We cannot blow up, we can only bleed to death," Taleb says, and bleeding to death, absorbing the pain of steady losses, is precisely what human beings are hardwired to avoid.

...the day was not yet half over and Empirica was already in the red to the tune of several hundred thousand dollars. The day before that, it had made back eighty-five per cent of its money; the day before that, forty-eight per cent; the day before that, sixty-five per cent; and the day before that also sixty-five per cent; and, in fact-with a few notable exceptions, like the few days when the market reopened after September 11th -- Empirica has done nothing but lose money since last April.

clay wrote:Does anyone know of a link to an article or other discussion about the demise of Taleb's fund?

Hedge funds, being private, are sometimes difficult to get info about....

July 14, 2007 WSJ: Empirica Capital LLC founder and author Nassim Nicholas Taleb is helping start Universa Investments LP, a California-based hedge fund raising more than $1 billion for a special fund based on ideas in his investment books.

Nassim Nicholas Taleb was last seen holstering his trading guns in 2004 after his hedge fund, Empirica Capital LLC, posted several years of lackluster returns when the fund's bets on a market swoon failed to pay off as stocks rose steadily.

Now, Mr. Taleb has a new book, "The Black Swan: The Impact of the Highly Improbable," a bestseller that follows his "Fooled by Randomness," published in 2001, which enjoys a cult-like status in the hedge-fund industry.

Empirica, started in 1999, was designed to offer large investors — typically other hedge funds — protection from huge market declines. In 2000, it had a return of about 60% after fees as the dot-com stock bubble burst.

The fund’s returns soon dwindled, as a widely followed measure of market volatility — the Chicago Board Options Exchange’s implied volatility index, or VIX — plunged to historic lows. Empirica posted losses in 2001 and in 2002, and in 2003 and 2004 it had low single-digit gains, two years when hedge funds posted average returns of 20% and 9%, respectively. It had about $375 million under management when it returned most of its assets to investors.

Mr. Taleb won't be directly involved in day-to-day trading at Universa. Instead, he will be an adviser and will have a large stake in it. Mark Spitznagel, a former Empirica trader, will manage the fund's daily activities.

The launch of Universa may have auspicious timing that willtest Mr. Taleb's theories. Jitters about whether the wideningsubprime mortgage meltdown will rattle the financial system arespreading. Still, the markets in the past few years have sailedthrough such white-knuckle events as Hurricane Katrina and the$6 billion meltdown of the Amaranth Advisors hedge fund.Yesterday's rally suggests investors may shrug off the latestwave of fear.

His trading career has been characterized by long periodsof lackluster returns -- punctuated by sudden jackpots --a hallmark of his unique investing approach.

Mr. Taleb says it was the daily grind of trading in a low-volatilitymarket that motivated him to quit. "I burned out," he says."If I go three or four years without a big bang [in the market],I start having battle fatigue."

I'm not saying that Taleb's idea isn't sound on a grand scale or theoretical level. But it clearly wasn't viable in the marketplace. The results for Taleb and Niederhoffer are similar: both with their funds shut down, due to failure to make money. I'm not trying to impugn the intelligence of either; I'm just saying that both were in the business of making money on risk, and both failed despite all their advantages.

There is a wonderful undertone of schaudenfreude in this forum. The perverse desire to take pleasure in the sufferings of others.

Hedge fund managers are all wild speculators. Those who borrowed sub prime deserve to be hunted for years by debt collectors, and driven to living in the back seats of cars. That's just punishment. Those who invest in hedge funds are all fools.

Yet Boggleheads, who rely on an accident of statistical history, by and large (that stocks outperform other investments in real terms on a 20 year horizon) are the soul of prudence.

REITs must be a screaming buy, having gone down 20%.

TIPS are a bad investment. The government fixes the CPI. Zvi Bodie? Who he?

Annuities are for wimps.

Social Security is a crime, stealing from the American worker.

If we get a really bad bear market, this forum might well cease to exist, so we wouldn't have the satisfaction of reconvening to note how badly *our* investment policies had failed us. Ditto if we hit high inflation again (which wipes out stock *and* bond returns).

And what ridiculous risks we took.

We're all gamblers, guys and gals. We don't leverage (those of us who have paid off our houses). And we are betting with some economic logic behind us (more risk, more return). But we are gambling.

There is a wonderful undertone of schaudenfreude in this forum. The perverse desire to take pleasure in the sufferings of others.

Hedge fund managers are all wild speculators. Those who borrowed sub prime deserve to be hunted for years by debt collectors, and driven to living in the back seats of cars. That's just punishment. Those who invest in hedge funds are all fools.

Yet Boggleheads, who rely on an accident of statistical history, by and large (that stocks outperform other investments in real terms on a 20 year horizon) are the soul of prudence.

REITs must be a screaming buy, having gone down 20%.

TIPS are a bad investment. The government fixes the CPI. Zvi Bodie? Who he?

Annuities are for wimps.

Social Security is a crime, stealing from the American worker.

If we get a really bad bear market, this forum might well cease to exist, so we wouldn't have the satisfaction of reconvening to note how badly *our* investment policies had failed us. Ditto if we hit high inflation again (which wipes out stock *and* bond returns).

And what ridiculous risks we took.

We're all gamblers, guys and gals. We don't leverage (those of us who have paid off our houses). And we are betting with some economic logic behind us (more risk, more return). But we are gambling.

While I agree with the annoyance about moralizing, I disagree with the use of "we."

The only thing that really binds people reading www.Diehards.org is that these people are interested in reading Diehards.org

When you look at details, there is a variety of opinions on index vs. managed, Vanguard vs. others, IRA, TIPS, gold, housing, retirement, etc. And this is only among people who write; how about all those who only read? For all we know, these may include Niederhoffer and Taleb.

Taleb himself warns about the dangers of categorization, because it reduces information and hides (or even creates) Black Swans.

No REITs, no small value for me at this time. I don't own TIPS, but do own some corporate CPI-linked notes (double evil on that, because corporates are bad, too!).

If we have a really bad bear market, I'll come out just fine. My equity exposure is nowhere near 100%. The financial markets should not dictate how I live my life (well, other than the fact that I earn my salary in this business; even more reason not to put everything in equities).

What I do share with most Bogleheads is that taking extremely aggressive positions, especially those on leverage, is a strategy doomed to fail in the long run. I haven't finished the full New Yorker article that Goggles posted below, but the implication of it is that despite Niederhoffer's impressive intellect he was completely irrational and a perfect example of Taleb's "fooled by randomness" argument. Are we all fooled by randomness to some extent? Sure, but the simple understanding not to make huge bets on that randomness is what keeps you in the game.

VictoriaF wrote:While I agree with the annoyance about moralizing, I disagree with the use of "we."

The only thing that really binds people reading www.Diehards.org is that these people are interested in reading Diehards.org

When you look at details, there is a variety of opinions on index vs. managed, Vanguard vs. others, IRA, TIPS, gold, housing, retirement, etc. And this is only among people who write; how about all those who only read? For all we know, these may include Niederhoffer and Taleb.

Taleb himself warns about the dangers of categorization, because it reduces information and hides (or even creates) Black Swans.

Victoria

Victoria, you make a valid point, as ever.

I do think though that much Boglehead investing is predicated upon a maintenance of historic relationships: equities outperform everything else, etc.

The case for that is probably weaker now than it has ever been (except in 1999-2000). However I am heavily weighted in equities.

matt wrote:What I do share with most Bogleheads is that taking extremely aggressive positions, especially those on leverage, is a strategy doomed to fail in the long run.

I think the more sophisticated understanding (which I know you have) is the Principle-Agent problem. For the hedge fund manager, a high risk strategy with an annual payoff, is rational against the interests of his or her client, who is interested in wealth maximisation.

However clients, and by and large they are sophisticated clients if they invest in hedge funds, know this. Yet they invest in hedge funds.

The discussion of 'Capital Decimation Partners' a hedge fund which has a negative expected return, but will make out like billiou on the way, is absolutely classic.

I feel that way, sometimes, about some of the diversification strategies discussed here .

One could say the same about active management in general, although there the buyer (say the average 401k investor) is much less sophisticated.

I haven't finished the full New Yorker article that Goggles posted below, but the implication of it is that despite Niederhoffer's impressive intellect he was completely irrational and a perfect example of Taleb's "fooled by randomness" argument. Are we all fooled by randomness to some extent? Sure, but the simple understanding not to make huge bets on that randomness is what keeps you in the game.

He's a speculator. Pure and simple. He takes big risks, in search of high reward.

Taleb's fund, which was predicated on the opposite extreme (losing money, predictably, day in day out, until the big blowup happens) was, apparently, closed due to lack of investor returns and interest.

Principal-Agent is a problem with many types of delegation. Aggressive use of leverage is certainly one extension of the problem with some hedge funds, but leverage itself is a separate issue that, as that discussion showed, can be used by the principal himself. I think that particular individual who started the discussion, who manages his own finances with few intermediaries, is going to blow up someday. Unfortunately, his strategy of using LEAPS is not even going to compensate him very well if he doesn't blow up, as I think he'll underperform the market in the long run regardless of what happens. I think he ignored that you have to pay for implied volatility in options. He seemed to be treating assumptions on futures as if they applied equally on options, which is not the case.

New to the forum, but not surprised too much at the hostility to hedge funds. Sure, fees are hefty, but if I could get money into Stevie Cohen's fund, I'd happily pay his exorbidant fees.

Half of me believes the asset allocation theory, and we do our share of indexed investing/rebalancing, etc. The other half believes it is quite possible for managers to generate alpha consistently, and so we have placed bets with both fee-wrapped discretionary accounts, and hedge funds.

Dataset is too small to draw conclusions, but thus far both strategies seem to be working fine. Hedge funds in particular can be a good ways of making bets in non-correlated strategies, although the non-correlations totally reversed for us this summer, so who knows.

D Train wrote:New to the forum, but not surprised too much at the hostility to hedge funds. Sure, fees are hefty, but if I could get money into Stevie Cohen's fund, I'd happily pay his exorbidant fees.

Half of me believes the asset allocation theory, and we do our share of indexed investing/rebalancing, etc. The other half believes it is quite possible for managers to generate alpha consistently, and so we have placed bets with both fee-wrapped discretionary accounts, and hedge funds.

Dataset is too small to draw conclusions, but thus far both strategies seem to be working fine. Hedge funds in particular can be a good ways of making bets in non-correlated strategies, although the non-correlations totally reversed for us this summer, so who knows.

Valuethinker wrote:There is a wonderful undertone of schaudenfreude in this forum. The perverse desire to take pleasure in the sufferings of others.

Valuethinker:

First, I want to complement you on your contributions to this board and tell you how much I appreciate your posts. You have very some very thoughtful and original insights.

Second, time to disagree with you about your assessment that there is schadenfreude on this board. I really don't think there is ill will towards others or a feeling of glee for the pain of others. Rather, there are a bunch of people that believe in personal responsibility.

Let's apply the concept of personal responsibility to the housing issue which is a popular one here and perhaps the reason you feel there is schadenfreude. People took enormous risk in housing and many reaped wonderful rewards. However now that the risk has shown up, all the people that got caught are looking for a bailout. Many people made tons of money flipping houses and then got caught on the last flip. I don't see these people offering to give back the money from the previous flips but they certainly want to be bailed out on the turkey they can't presently sell. Hedge funds wouldn't have had the money to lose were it not for the tremendous risks and the associated rewards during the heydey of subprime. I, and many others here, just don't feel bad for anyone that got caught but we are certainly not happy for their pain (Schadenfreude). We just think they need to be accountable for their actions. Many people here feel that if extreme risktakers get the upside of risk when it works out then they need to take the downside of risk when it does not. How is this in any way related to schadenfreude?

As an aside, we are not talking about people starving on the street. There needs to be a social safety net but there does not need to be a provision that eveyone that overextended them self on the Miami beach condo should be entitled to keep the ocean view. I don't see anything wrong with this and, in fact, I see it as moral and just. Otherwise moral hazard runs rampant.

Valuethinker wrote:If we get a really bad bear market, this forum might well cease to exist, so we wouldn't have the satisfaction of reconvening to note how badly *our* investment policies had failed us. Ditto if we hit high inflation again (which wipes out stock *and* bond returns).

Quite a few of us were posting at M* during the last bad bear market. The forum greatly increased in popularity as people finally began to see the wisdom of investing based on asset allocations instead of chasing hot funds or stocks. I expect the same will happen again in the next downturn. Our core advice has always been on the conservative side. The more severely someone get burned by aggressive investing, the more likely they are to find their way here.

BTW, it got so busy in early 2001 that (due to deficiencies in M*'s interface) it became extremely difficult to follow conversations for longer than a day. This provided the catalyst for diehards.org.

Alex Frakt wrote:Quite a few of us were posting at M* during the last bad bear market. The forum greatly increased in popularity as people finally began to see the wisdom of investing based on asset allocations instead of chasing hot funds or stocks. I expect the same will happen again in the next downturn. Our core advice has always been on the conservative side. The more severely someone get burned by aggressive investing, the more likely they are to find their way here.

BTW, it got so busy in early 2001 that (due to deficiencies in M*'s interface) it became extremely difficult to follow conversations for longer than a day. This provided the catalyst for diehards.org.

Alex,

I am an example of what you are saying; I joined the Morningstar forum in October 2001. One difference is that now there are many new economics blogs, Google, Wikipedia, and other web-based resources, and it may be faster to get information directly elsewhere than to read through Diehards messages.

On the other hand, some of the best web resources I discovered where first recommended by somebody on this board...

D Train wrote:Half of me believes the asset allocation theory, and we do our share of indexed investing/rebalancing, etc. The other half believes it is quite possible for managers to generate alpha consistently, and so we have placed bets with both fee-wrapped discretionary accounts, and hedge funds.

Doublethink - The power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them.

Similar to some others, I both value the input from, but also disagree with, Valuethinker on the generalization he makes as to the attitudes of the 'average' Boglehead (assuming the species exists.)

I'll be brief, and only address one point - leverage. It seems to me that the more leverage you apply, the further you likely are from adding value to the whole human endeavor and the more you are likely a plain speculator. I am neither a pure capitalist, nor a budding socialist, but I think that the order of things in this planet is to tend to value those that add to society, and to eschew those that hope merely to extract wealth for no fair exchange. So, it is true I have no love lost for short sale artists, home flippers, hedge fund speculators, or other parasitic life forms.

DRiP Guy wrote:Similar to some others, I both value the input from, but also disagree with, Valuethinker on the generalization he makes as to the attitudes of the 'average' Boglehead (assuming the species exists.)

I'll be brief, and only address one point - leverage. It seems to me that the more leverage you apply, the further you likely are from adding value to the whole human endeavor and the more you are likely a plain speculator. I am neither a pure capitalist, nor a budding socialist, but I think that the order of things in this planet is to tend to value those that add to society, and to eschew those that hope merely to extract wealth for no fair exchange. So, it is true I have no love lost for short sale artists, home flippers, hedge fund speculators, or other parasitic life forms.

You may call it whatever you like. I call it Prudence.

DRIP Guy,
I 99% agree with you. My one point of slight disagreement is regarding short sellers. IMHO I think short sellers can add value by exposing fraudulent and corrupt management (think Enron). I'm not saying they are all good, but that I think they can add value to society.
cheers
grok

Valuethinker wrote:If we get a really bad bear market, this forum might well cease to exist, so we wouldn't have the satisfaction of reconvening to note how badly *our* investment policies had failed us. Ditto if we hit high inflation again (which wipes out stock *and* bond returns).

Quite a few of us were posting at M* during the last bad bear market.

Alex

That wasn't a 'real bear market' (TradeMarked .

Stocks only dropped 50%, and the duration was only 36 months.

What I'm thinking of is 70%+ and a 10 year slump. When stocks go down, and they just don't recover.

Think Japan, or 1968-1980 in the US.

The record of stock investment suggests that every few decades we have another one of these.

And then hopefully 2016-2032 Boom! (And in 2029 I'll retire at 60, and have most of my money in bonds, ready for the next Bust!)

Okay, the sample period is ridiculously small... so who knows what's going to happen? But don't act like today's Bust is unprecedented. Stock market went down 50% 34 years ago.... and then was followed (after a few years of trading sideways) by a 1000% increase (Dow 1000 to Dow 10000).

Will that happen again? No idea... but we know it's happened before, so it's certainly possible.

Valuethinker wrote:The case for that is probably weaker now than it has ever been (except in 1999-2000).

I'm not sure where you're getting this.... Just because the stock market crashed in 1999 and today doesn't mean the case is weak for equities outperforming everything in the long run...

It's not like we haven't seen crashes before...

Hey genius, you're quoting a post from October 2007!

Valuethinker was saying that the case for equities outperforming at those historically high valuations was low, and guess what, he was right! On the other hand, now that we've had this crash and valuations are back to "normal" or even low, I think even the most cynical among us can agree that stocks are likely to post decent or great returns, even if volatile, over the coming years.

DRiP Guy wrote:I'll be brief, and only address one point - leverage. It seems to me that the more leverage you apply, the further you likely are from adding value to the whole human endeavor and the more you are likely a plain speculator. I am neither a pure capitalist, nor a budding socialist, but I think that the order of things in this planet is to tend to value those that add to society, and to eschew those that hope merely to extract wealth for no fair exchange. So, it is true I have no love lost for short sale artists, home flippers, hedge fund speculators, or other parasitic life forms.

I'm not taking pleasure in others losing tons of money, even those invested in hedge funds. However, as a believer in the basic Bogle philosophy, I don't believe active management works. Therefore, I believe that expensive active management vehicles such as hedge funds are poor investments. I'm appalled that despite mountains of evidence that active management doesn't work over long time periods, university endowments, charities, pension funds, etc. have invested in these vehicles anyway. The net result appears to be a great injustice - I see immense wealth in the hands of Wall Street managers, and increasingly desperate situations developing among the investors. So, yes, I am "happy" to see the risks show up for hedge funds, only because I believe it's the only thing that will convince fiduciaries that there is no shortcut to easy above-market returns available at any price.

DRiP Guy wrote:I'll be brief, and only address one point - leverage. It seems to me that the more leverage you apply, the further you likely are from adding value to the whole human endeavor and the more you are likely a plain speculator. I am neither a pure capitalist, nor a budding socialist, but I think that the order of things in this planet is to tend to value those that add to society, and to eschew those that hope merely to extract wealth for no fair exchange. So, it is true I have no love lost for short sale artists, home flippers, hedge fund speculators, or other parasitic life forms.

Depending on the time period, the average joe either loved or hated those interest charging leeches.

Robert

Honestly? I had micro and macro econ in college 25 years ago. I have read about the Fed Reserve system. I use a bank every day. I let them pay me interest on my deposits. I have had loans with them.

And yet, to this very day, to this very moment, I remain as staunch as I always have been, in my queasy distress with the notion that a bank can gather in deposits (notes, bills, gold, whatever), and then somehow give out more than the sum between those outlays and what it holds in reserve (capitalization requirements). Money for nothing, chicks for free.

I still arcanely think of money as just a medium of exchange, for a service, a good, a durable item, food... and therefore a store of wealth by serving as "evidence" of work done or value provided. A "chit", which can be stored like a capacitor charge ('banked') and then spent at a more convenient time...following the law of conservation, however, that you can get no more out of the system than you put in. Debt (including my own bank loan and mortgage in prior days, throws a wrench into the works) though does'nt it? You gave me a car, and I gave you.... "my word"? Boom money, created right there, just because I hoped for it.

So, I must disqualify myself from proffering a serious opinion on banks, since my views are singularly arcane, and apparently held by no one but myself, and are incompatible with the whole central bank, monetary policy modern finance process. I use it, but I sure don't *really* understand or trust it, book larnin' or no.

I want to know if Taleb has made out a like a bandit. With everybody whining, "No one ever could have expected this kind of volatility," it seems he should!

According to him, he made 90%+ of all his investment profits in 1987. And because his investment style can't lose that much money in a year, it would take him many, many dry years before he would be underperforming again. On the other hand, his strategy of investing in way out of the money options doesn't work that well anymore since those options cost a lot more now. And he doesn't care that much about money now as far as I can tell.

I want to know if Taleb has made out a like a bandit. With everybody whining, "No one ever could have expected this kind of volatility," it seems he should!

According to him, he made 90%+ of all his investment profits in 1987. And because his investment style can't lose that much money in a year, it would take him many, many dry years before he would be underperforming again. On the other hand, his strategy of investing in way out of the money options doesn't work that well anymore since those options cost a lot more now. And he doesn't care that much about money now as far as I can tell.

Actually, there was an article in the WSJ about Taleb a little while ago. He was up 65% to 115% in October, according to the article.

--

* NOVEMBER 3, 2008

October Pain Was 'Black Swan' Gain

By SCOTT PATTERSON

For most of October, it seemed nearly everything that could go wrong with the markets did. But the rout turned into a jackpot for author and investor Nassim Nicholas Taleb.

Mr. Taleb last year published "The Black Swan," a best-selling book about the impact of extreme events on the world and the financial markets. He also helped start a hedge fund, Universa Investments L.P., which bases many of its strategies on themes in the book, including how to reap big rewards in a sharp market downturn. Like October's.
[Nassim Nicholas Taleb]

Nassim Nicholas Taleb

Separate funds in Universa's so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. "We're discovering the fragility of the financial system," said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.

A professor of mathematical finance at New York University, Mr. Taleb believes investors often ignore the risk of extreme moves in the market, especially when times are good and volatility is low, as it was for several years leading up to the current turmoil. "Black swan" alludes to the belief, once widespread, that all swans are white -- a notion that was proven false when European explorers discovered black swans in Australia. A black-swan event is something that is highly unexpected.

Assets under management at Universa have neared $2 billion since the fund launched early last year with $300 million under management. While Mr. Taleb frequently consults with Universa's traders, the Santa Monica, Calif., fund is owned and managed by Mark Spitznagel, who worked for several years in the 1990s as a pit trader on the Chicago Board of Trade.
[Mark Spitznagel]

Mark Spitznagel

To execute its strategy, Universa buys far-out-of-the-money "put" options on stocks and stock indexes. These are bets that the market will see a sharp, sudden downturn. They become extremely valuable in a market decline of 20% or more in a one-month period.

When times are good, such options are cheap and Universa gobbles them up, taking small losses along the way. When the market makes a quick, steep turn south, as it has recently, Universa's positions gain value as investors scramble to protect themselves in the downturn by buying puts. The strategy, which keeps more than 90% of assets in cash or cash equivalents such as Treasury bonds, either breaks even or loses small amounts in most months while waiting for periodic, infrequent spikes in volatility.

Here's an example of a trade the fund made recently. In late September, when the Standard & Poor's 500-stock index was trading around 1200, Universa purchased put options that would pay off if the index fell to 850 by late October. Since such a plunge was considered highly unlikely, such options cost only 90 cents. On Oct. 10, those options cost $60 as the S&P 500 tumbled sharply. Universa sold most of its position in the high-$50 range.

Universa also purchased a number of puts on financial stocks, such as Goldman Sachs Group Inc. In late July, it paid $1.29 apiece for options on American International Group Inc., the insurance giant that by September was on the brink of bankruptcy. The puts were priced to pay off if AIG dipped below $25 a share by September. Universa eventually sold them for about $21 apiece.

The fund has "done what it was supposed to do for us," says John Salib, a partner at Landmark Advisors, a New York fund that invests in other hedge funds and that invested in Universa in July. "We wanted to protect our portfolio against this kind of environment."

Mr. Taleb made his first killing on Black Monday, the crash of Oct. 19, 1987, as a trader with the investment bank First Boston (now a part of Credit Suisse), with a large position in out-of-the-money Eurodollar contracts. Investors fled into the highly liquid contracts as the market crashed, causing their value to surge.

While the black-swan strategy has paid off handsomely this year, it hasn't always. Mr. Taleb's previous fund, Empirica Capital, which used similar tactics, shut down in 2004 after several years of lackluster returns amid a period of low volatility. The strategy may face another test after the current bout of market turmoil.

The task for the fund's managers is to persuade clients to stick around after their big gains. Historically, such dramatic downturns have been rare events, occurring only once or twice a decade.

Mr. Spitznagel cautions against optimism. "You could say that so much value has been destroyed that there just isn't much left," he said. That is "a dangerous assumption, since things can always get worse."

When I said that his strategy doesn't work that well, I really should have said as well. I think 1987 was an extraordinarily good year for Taleb... this year might pale in comparison?? (Note that in 1987, the pricing for OTM options was likely much lower.)

Here is a quote from a March 2008 article on Taleb:

The payday for Taleb was big. Without divulging the amount, he says 97 percent of the money he's ever made was on Black Monday in 1987.